Flaherty’s rule changes will bite hard: mortgage brokers

The Finance Minister’s moves to slow down Canada’s housing market have gone too far and are putting the economy at risk, the national mortgage brokers’ association argues in a report to be released Monday.

The report says that many of this country’s economists and real estate associations are being overly optimistic, and don’t appreciate how significantly Flaherty’s latest round of changes, which came into effect during the summer, will affect the resale housing market.

In June, Flaherty changed the rules for mortgage insurance, making it harder to qualify – and therefore harder for some people to borrow the money to buy a home. The key change was to limit the amortization on insured mortgages to 25 years; anyone who wants to take longer than that to pay off a house will have to make a down payment of at least 20 percent of the price of the home. The new rules also deny mortgage insurance on homes of $1 million or more.

Some economists are saying the recent slowdown in housing sales in many markets is because of the changes. But the report by the Canadian Association of Accredited Mortgage Professionals (CAAMP) argues that the real impact has not been felt yet, and it will take time for it to trickle through the market.

“The changes to the mortgage insurance criteria are unnecessarily jeopardizing the health of Canada’s housing markets and the broader economy,” says the report, which is the group’s annual look at the state of the housing market. It was written by CAAMP chief economist Will Dunning, and notes that the opinions he expresses are his own “and are strongly felt.”

Flaherty has tightened mortgage insurance rules four times in four years in an effort to stem the growth of consumer debt and house prices. His fear has been that Canadians are taking on too much debt in the form of mortgages, and that the market – especially certain pockets, such as Toronto’s condo market and Vancouver – was heating up too quickly. His aim has been to help the market find a “soft landing” and prevent a crash. He has suggested that he believes the changes are having their intended impact.

Mortgage brokers were among those who challenged the wisdom of the latest changes when Flaherty announced them, and have argued that he should consider reversing some of the rules.

The CAAMP report suggests that more than 16 percent of the high-ratio borrowers (that is, those with a down payment of less than 20 percent) who obtained a mortgage in 2010 would no longer qualify if they had sought that same mortgage under today’s rules.

A survey conducted for CAAMP suggests that 55 percent of home sales are financed with a high-ratio mortgage. “If 16.9 percent of potential high-ratio buyers are removed from the market, this would reduce total home sales by about 9 percent,” the report says.

During the period from August to October, the sales rate for existing homes was 7.8-percent lower than in the previous year, it says. “The analysis concludes that the impacts will become larger: reduced activity at entry levels means that move-up activity will also be gradually impacted, because potential move-up buyers will find it more difficult to sell their current homes.”

It will also take “quite some time” for housing starts to show the consequences of the rule changes, Dunning writes. Canada Mortgage and Housing Corp. is forecasting housing starts to be at 213,700 this year and then fall to 193,600 in 2013. Dunning forecasts that they will fall further, to 170,000, in 2014.

“The revised mortgage insurance criteria, by creating a policy-induced housing market downturn, which is likely to be deeper and longer-lasting than is generally expected, is unnecessarily raising economic risks in Canada,” the report argues.